Until yesterday, the last time the RBA lifted the cash rate was November 2010. You may recall seeing the news on your brand new iPhone 4, just a month after the Pies won the Grand Final rematch against the Saints.
The cash rate back then was 4.75%. Today it is a measly 0.35%. It has been less than 2.0% for seven years now. Thus, we have become very accustomed to cheap money.
Borrowing is about to become marginally more expensive.
Does this mean doom and gloom for property prices? Is this the inflexion point and we should expect prices to fall precipitously from now on?
Time will tell. But our best guess is that things will hold up better than expected.
Even if we see consecutive rate hikes into next year as predicted, the current forecast is that the cash rate will still sit somewhere between 1.3% and 2.25% by the middle of next year.
Historically this is still incredibly low.
Yes, it’s all relative. If real interest rates increase by 2.0%, the cost of a mortgage on a two-million-dollar loan will increase by more than $2,000 a month, which sounds like a lot.
But if you have a two-million-dollar loan, you can probably afford it.
Firstly, because this is likely your second or third home and you have built up a substantial amount of equity over the years. In fact, you saw your equity increase by 15 – 20% last year alone in the strongest property market in decades.
Secondly, because your savings have substantially increased since Covid and you have more of a buffer sitting in your offset account than three years ago.
Apparently, the average borrower is 17 months ahead on their mortgage right now, compared to nine months pre Covid.
And lastly, you are probably on a very good income and/or have the financial support of a relatively wealthy and asset-rich family to support you if times get momentarily tougher.
I understand this sounds elitist, but this is Stonnington, one of the most affluent municipalities in Australia, and therefore the world.
This is an area where an entry level family home now costs more than $3,000,000 in Glen Iris or $5,000,000 in Armadale; where a 25-year old needs a million dollar loan from the ‘Bank of Mum and Dad’ to even scrap together enough to buy an unrenovated two bedroom cottage in Prahran, and then rent out the second bedroom to help cover the remaining $500,000 mortgage.
If you hadn’t noticed by the number of Porsche SUVs driving up and down High Street, there is more collective wealth in Stonnington than ever before, and interest rates creeping up by one or two percent over a couple of years are unlikely to burst that bubble so quickly or easily.
Just have a chat to any Baby Boomer and they’ll gladly tell you of a time when interest rates were 17% and video rentals were a booming business.
Times change, but good real estate does not.
There will continue to be a strong market for quality homes in Stonnington regardless of a cash rate of 0.35% or 1.35% or 2.35%.
I do not wish to minimise the impact of rate hikes on the cost of living. There could be tough times ahead for many Australians. In some instances, there will be fire sales and defaults. But that will be vanishingly rare in Stonnington.
Most people can’t afford to live in Stonnington. With higher interest rates there will be a slightly larger proportion of people who can’t afford to buy here. There may even be a modest correction in prices in the short to medium term.
But the only thing we can be certain about is that there are myriad things that we simply cannot know or predict.
It was taken at face value that interest rates would not increase until 2024. The RBA said so! And then it became 2023. And yet here we are in May 2022 facing consecutive increases.
It was taken at face value that house prices would tumble during a global pandemic and we would likely see deflation. And yet here we are two years later with house prices up 30% and inflation at a decades-high 5%.
It is very easy to get caught up in the hype and the noise. I understand why some buyers are holding back right now, waiting to see if they can get a better deal in six months’ time.
I understand why some vendors are very nervous to list their home right now, with even more uncertainty than usual.
But if you take a pragmatic approach, what is going to serve you best? To buy now or wait? To sell now or wait?
If you’re a buyer and you can still lock in an historically low interest rate and comfortably weather a few rates hikes, why not buy a great house now with a bit less competition as others sit and wait? There could be a lot less stock and choice if things tighten up.
If you’re a seller and you can lock in a great price now coming off the back of a 20% windfall last year alone, why not sell before things get tougher, if that’s what you think will happen?
If you’re both buying and selling in the same market, does it really matter what prices do over the next year or two?
When taking a long-term view, quality real estate in Stonnington is one of most bulletproof assets you could possibly hold.
Hopefully we can help you find some.
Feature Image: 66 Tivoli Road, South Yarra